Russia: a brief market watch

RUSSIA ECONOMICS - In Brief 01 Jul 2022 by Alexander Kudrin

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The ruble touched the R/$50 mark recently and encouraged the Ministry of Finance’s verbal interventions. The ministry now plans to discuss ways of “weakening” the exchange rate. One of the ways considered by the authorities could result in purchasing currencies of “friendly” countries on the open market. It could resemble a kind of modified fiscal rule. The efficiency of this step is not so obvious, as the market demand for such currencies is low, and it is not clear how the ministry may use them in the future. However, the authorities plan to discuss other options in the coming weeks. Banks’ liquidity (net position with the CBR) keeps climbing. Combined with disinflation, the abundance of liquidity pushes local interest rates lower. The yield curve remains almost flat, and the difference between 10Y OFZ and the overnight interest rate (RUONIA) is -20 bps. Euroclear didn’t transfer money, which it received from the Finance Ministry at the end of May, to the holders of Russia-26 and 36 during the grace period, which finally led to an “event of default” as was qualified by rating agencies. Meanwhile, the Russian authorities offered a mechanism of payments in rubles (at the current exchange rate) for all Sovereigns. Investors may then convert rubles into hard currencies. The government executed the first transfer at the end of June, but this money remains in the local depositary. We expect the proper testing of this mechanism to happen in the next several weeks. It’s difficult to say how ready international investors will be to use this mechanism, but prospects of receiving money via legal claim look even more questionable. If the proposed scheme proves efficient, it will...